Each quarter we try to share something practical. A piece of advice, a thought provoking idea, or other simple strategy that you can apply to your financial life. Most of these pieces are derived from concepts connected to behavioral financial advising. Behavioral advice is a critical component of any financial plan, and there is evidence to support the fact that this type of advice can be as critical in achieving financial goals as other, more traditional, forms of financial advice.
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Why is it that we tend to focus on short term investment performance, when research tells us that other factors are more critical to our long term financial success?
It's a marathon, not a sprint. Missing the forest for the trees. Drowning in the details.
We have so many idioms to remind us to slow down, zoom out, and take in the big picture. Yet, our brains seem laser focused on trying to pick complex patterns out of limited data. In fact, we are somewhat hard wired to find patterns, and evolutionarily that has been critical to our success as a species. This trait, however, does not necessarily translate into making us good investors. In fact, a short term view of investing is often the exact behavior that is most likely to derail us from our long term goals.
A number of well studied cognitive biases influence how and why we advise clients to try and ignore short term market volatility, and instead set financial goals that align with personal values, and then create a plan to work toward them. Nothing is certain, but we believe financial planning that focuses on these "values aligned goals" has a higher likelihood of success than almost any other short term strategy.
Big wins early on, do not always lead to podium finishes. Rather a continuous, disciplined approach is preferred.
Let's illustrate with an example inspired by the recent NCAA Women's Basketball Tournament which not only held its Final Four in Minneapolis, but also featured a home town celebrity, Paige Bueckers. Unfortunately, Paige's team, UConn came up 16 points short in the championship game. Their 45 point margin of victory from round one, was of little consolation. Even though UConn's 413 points throughout the tournament matched that of the champions, at the end of the day, South Carolina scored more points when it mattered.
We hope the connection back to financial planning is obvious, but will spell it out anyway. The biggest factor for most clients to consider for their portfolio is: will there be enough assets in the right buckets at the right times for them to achieve their goals?
Volatility, market trends, hot stocks, and cool ideas are all pieces of the puzzle, but more often than not investors over compensate, get over confident, or overreact to short term phenomenon and end up jeopardizing the ultimate goals that they are pursuing.
At Open Door Financial we know that it can be exciting to focus on short term returns. We understand the challenge of staying the course when times are tough. But, we also believe that a well balanced and disciplined approach offers our clients the best chance at alignment between their goals and their reality. Sticking to this plan, however, requires a strong team, good endurance, and a wise coach.
-Open Door Financial
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